Rent vs. buy
Rent and invest the difference, or buy your own? A comparison of net worth over the years, not of the monthly payment.
Rent is not automatically money thrown away, and a mortgage is not automatically an investment.
Rent buys you housing for that month, in exactly the way mortgage interest buys you the use of borrowed money. Neither one ever comes back.
What builds wealth on a mortgage is not the instalment as a whole but only the part of it that goes to the principal. The rest, the interest, the insurance, the repair fund, the maintenance, is a cost in precisely the way rent is.
And the other way round: a renter who did not have to put down €50,000 still has that money. Invest it and they build wealth too. Spend it and they build nothing, which is where this comparison most often falls apart.
Why the comparison is not straightforward
Setting rent of €900 beside an instalment of €950 and declaring the mortgage more expensive is misleading. Those two figures measure different things.
So what is compared here is net worth, what you would own after some years either way. When buying, that is the value of the property less the debt still outstanding; when renting, the value of the investment portfolio.
What moves the result
- Growth in the property price
- The strongest lever in the model. An owner is leveraged: the growth applies to the whole price of the property, not just to the money they put in. That is why a single percentage point moves the result by tens of thousands.
- Investment return
- The same lever on the other side. The more the renter's portfolio earns, the sooner it catches the owner. Neither return is guaranteed.
- Growth in the rent
- An instalment on a fixed rate stays the same for years; rent does not. The faster rent rises, the sooner owning pays.
- Interest rate
- It decides how much of every instalment disappears into interest instead of becoming yours. On an expensive mortgage, renting becomes competitive.
- Ownership costs
- Maintenance, the repair fund and insurance carve into the result every month. A renter does not pay them, and that is part of what freedom buys.
- Time
- A short horizon works against buying, because the costs of buying and selling have no time to spread out. A longer horizon gives room to both price growth and compounding.
- Liquidity
- It does not fit into the numbers. A portfolio sells in days, a property in months and at a cost. Then again, nobody can give you notice on a flat you own.
How the comparison is kept fair
Both households spend, every month, on housing exactly the same amount, whatever the more expensive of the two costs. The cheaper one invests the difference.
It works in both directions. While the instalment costs more than the rent, the renter invests. Once rising rent overtakes the instalment, or once the owner has cleared the mortgage, the owner starts investing. Without that second half the model would quietly penalise buying.
The deposit is handled the same way: the buyer puts it into the property, the renter invests it the same day.
What the model leaves out
The costs of buying and selling: tax, agent fees, the notary, the land registry. Over a short horizon they decide the outcome, and the model does not include them.
Tax on investment gains, and any tax relief on the mortgage. A change of rate once the fixed period ends. A major repair that arrives all at once.
This tool does not give financial advice. It shows how your own assumptions would play out, not what you should do.
Related terms and tools
The foundations are principal, amortisation, annuity and compound interest. For the assumptions it is worth knowing inflation, return and risk.
The mortgage itself is taken apart by the mortgage calculator, the growth of an investment by compound interest and converting future sums into today's money by discounting.
If you already own the property, the next decision is handled by Invest or repay the mortgage. A long-term target is set in the FIRE calculator.
Related topics
Terms that come up in this calculation
- AmortisationPaying off a debt gradually through regular instalments. Each instalment covers the interest first and reduces the principal with what is left, and the balance between the two shifts over time.
- PrincipalThe amount you actually borrowed and have to return. Interest is the price of borrowing it, and it is always calculated on whatever of the principal is still outstanding.
- AnnuityA series of regular payments of the same size at equal intervals. On a loan it is the instalment that never changes for the whole of the repayment.
- Compound interestA way of charging interest in which the interest credited is added to the principal and earns alongside it in the next period, so you earn on interest earned earlier too.
- InflationThe general rise in prices across an economy, which gradually erodes the purchasing power of money: the same sum buys less in a few years than it does today.
Calculators that follow on from this one
- MortgageWork out your monthly mortgage payment, the total interest and the LTV, with a full amortisation schedule, overpayments and side-by-side scenarios.
- Early repaymentFind out how much an overpayment on your mortgage could save, and whether shortening the term or lowering the payment serves you better.
- Compound interestWork out how an investment grows under compound interest, including regular contributions, the effect of inflation, and a year-by-year breakdown.